- September 28, 2024
- Posted by: admin
- Category: Uncategorized
Withholding Tax on gardening, cleaning and maintenance services
Case Study: Banki Kuu Pension Scheme 2012 Registered Trustees v Commissioner of Domestic Taxes (Tax Appeal E754 of 2023) [2024] KETAT 1294 (KLR) (Civ) (30 August 2024) (Judgment)
KRA conducted investigations into the tax affairs of BKPSRT with a view of establishing whether BKPSRT was tax compliant for the tax period in respect of July 2018 – June 2020. The process was initiated by an electronic mail sometime in March, 2021.
Upon providing various documents requested by KRA, both parties had meetings and exchanged correspondence in a bid to resolve the audit issues. KRA then proceeded to issue an assessment letter on 27th June, 2023.
On 25th July, 2023, BKPSRT objected to the assessment and KRA rendered its objection decision dated 22nd September, 2023.
Aggrieved by KRA’s objection decision, BKPSRT lodged its its notice of appeal dated 19th October 2023 on even date.
Among the grounds of appeal was that ‘’ KRA erred in law and fact by subjecting services to withholding taxes that do not qualify as professional and management services, thereby erroneously arriving at the wrong conclusion that BKPSRT did not remit withholding tax.’’
BKPSRT argued that:
- KRA sought to demand withholding taxes on various maintenance services provided to BKPSRT amounting to Kshs. 149,674.00. BKPSRT submitted that the services offered by the service providers highlighted by KRA did not fall under the ambit of Section 10 of the ITA which provides as follows
“(1) For the purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of-
a. a management or professional fee or training fee;
………………………………..
the amount thereof shall be deemed to be income which accrued in or was derived from Kenya:
- Section 2 of the ITA defines “management or professional fees” as follows:
“a payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated.”
- BKPSRT stated that from the description of the services which are standard maintenance procedures on lifts and cleaning services offered to BKPSRT as evidenced by the sample invoices that it adduced as evidence, the services were maintenance supply services on various equipment that are provided to BKPSRT, and not professional or management services. This was on the basis that:
-the services are not managerial in nature as they don’t relate to management;
-the services are not professional in nature as maintenance services are not included in the list of professions in the Fifth Schedule to the ITA;
-the services are not consultancy as they do not relate to payment for acting in an advisory capacity or providing services on a consultancy basis;
-the services are not agency as the provider was not acting on behalf of BKPSRT;
-the services are not contractual fees as they relate to generator maintenance services, lift services and cleaning and gardening service; and
-such services would not be deemed as technical as special skills are not required.
KRA Responded That:
- the withholding income tax from the tax period November 2019 was charged on services related to repair, maintenance and overhaul of generator, maintenance of lifts and cleaning services which are technical, contractual and professional services thus are management or professional fee subject to withholding income tax.
- BKPSRT availed invoices and agreements for services on repair, maintenance and overhaul of generator and maintenance of lifts and cleaning services. KRA submitted that the services fall under management or professional services under section 2 of the ITA; and for which BKPSRT ought to have charged a withholding tax as provided for under Section 10 and 35 of the ITA\
In its ruling on 30/08/2024, the TAT observed That:
- BKPSRT hired various entities, one to maintain the lifts in its building, another to maintain the generator and some to carry out cleaning services and another, gardening services
- The payments for the services were covered by the definition of “management and professional fees” pursuant to section 2 of the ITA since the services offered were of a technical nature. Paragraphs 63 to 66 of the UN Model Tax Convention Commentary to article 12A provides as follows regarding the ordinary meaning of the term “technical”:
“the ordinary meaning of the term technical” involves the application of specialised knowledge skill or expertise with respect to a particular art, science, profession or occupation”.
- the services provided to BKPSRT as having been of a technical nature and those who provided those services had the special skills of gardening, cleaning, maintaining lifts or maintaining the generator. These were all occupations or jobs each of which required the person performing the tasks of having the specific skills in that area of service provision. As such the Tribunal was of the firm view that the services were of technical nature.
- BKPSRT paid the respective service providers a labour charge as well as for certain items (consumables) which the service provider would use in performing its services, however some invoices were not itemized.
- in calculating the amount from which tax was to be withheld, KRA ought to have excluded the consumables.
- KRA could only have considered the deduction of withholding tax on the amount attributable to the technical fee. The Tribunal was of the further view that technical fees less than Kshs 24,000.00 in a month, are not subject to withholding tax pursuant to section 35 (3) (f) of the ITA.
The Final Orders by the tribunal were:
‘’KRA to review the assessment in the next 60 days in respect of withholding tax on payments made to the providers of gardening cleaning and maintenance services to determine the correct taxes, if any, due and payable.’’
https://hisibati-consulting.co.ke/
